Imputed Interest needs to be understood in a very basic sense. It is an interest that a lender receives on an amount of money that was lent out. The amount of interest that is assumed to be received by the lender has to be reported as income on their taxes.
Imputed interest is the interest that a lender is entitled to receive but even though what the lender receives. Many a time, a person makes a below-market loan is when this notion comes into play. Every individual thinks of making investments in real estate but not everyone can do it due to the high value of properties.
Situations arise when the lender gives a loan to his family and friends. When such a loan is returned, it is done at an interest quite below the normal market loan rate. It is considered that generally loans to friends and family are not held as commercial transactions as one does so out of sheer love, affection and respect At the same time, a standard rate of interest on the loan must be taken. To lend financial support to invest in real estate to near and dear ones is a good deed but getting back the same amount is when an individual will not be in a deep soup.
Some of the features of Imputed Interest are:
The Imputed interest is helpful in situations when a person is in dire need of loans. Such transactions may not be commercial nor one can expect to get high market interest on the loan.
When a friend, relative, or sibling loses a job that he had then in that case one must extend help. One can expect the return of that loan within a short span of two or three years when such a person manages to accumulate another job. However, the lender cannot charge the interest that accrues upon the principal amount since it was done to help out.
A zero-coupon bond also works as a wonder since it is a debt security and paying interest is not required. A deep discount trades in this concept and on maturity full face value profits are offered.
Thus, Imputed interest makes it clear how much interest the lender is assigned to get. In certain situations, getting interested cannot be expected from the close ones to whom a person by his free will financially support by giving loans.
